We have just seen the biggest rise in interest rates in 27 years.
On August 7, the Bank of England raised the base rate by 50 basis points to 1.75%. The days of super cheap mortgages are over and we are going to have to get used to a new normal.
With a global inflation crisis driven by rising energy prices and supply chain issues, the BoE doesn’t have many tools at its disposal to try and stifle the highest level of inflation. inflation that we have known for 40 years.
One of the mechanisms they have is the ability to raise interest rates. We’ve been through a period of ultra-low interest rates, which were put in place after the financial crash to help stimulate the economy and encourage spending.
Interest rates have risen from a historic low of 0.10% to 1.75%, with further increases expected for the rest of 2022. What this means for UK mortgage holders ?
About 74% of mortgagors have a fixed rate mortgage. This will be a relief for most borrowers whose monthly mortgage payments will not be affected until their fixed rate ends.
However, most people will have fixed their mortgage for two or five years, so it won’t be long for many borrowers until their rate is renewed. This will be a blow to many households that are already struggling with higher expenses.
For those with a mortgage, now is a good time to explore the rate they are paying and consider locking in a new rate.
After the financial crash, strict mortgage regulations were put in place to try to prevent another crash from happening. Anyone who has recently applied for a mortgage will have already been subject to the strict Financial Conduct Authority guidelines that the banks have followed.
This includes banks assessing how much you can borrow based on a multiple of your income/or joint income (usually around 4.25 to 5 times the multiple of income) and strict affordability tests, which include the bank collecting details of your current contractual and discretionary monthly expenses and then testing your mortgage payments at a rate much higher than what you would have actually paid.
Most regulated mortgages (a mortgage secured by a home you live in) may have been priced at around 6-7% payout. It might have seemed prudent at the time if you could borrow at a fixed rate below 2% (even below 1% fixed at times over the past year).
Many of the fixed rate offers currently available are around 3.5% and above, and are likely to increase even faster.